What is depreciation expense?
The periodic charge that spreads a fixed asset's cost over its useful life. It sits in operating expenses. Cash does not move when you record it.
Definition
Depreciation expense is the slice of a long-lived purchase that this period's profit and loss statement takes. On the books, this is an operating expense, not a bank payment and not the asset account.
You record it so a freezer, van, or machine hits profit over the periods that use it. The purchase stays on the Balance Sheet while this charge, period by period, moves cost into the P&L.
Where it shows up
Balance Sheet: Related to accumulated depreciation, which holds the same dollars.
P&L: Located in operating expenses.
See also: Accumulated Depreciation · Depreciation Schedule · Non-Cash Expenses
When you look at your profit and loss statement, this charge usually sits with other operating expenses. It is this period's share of assets already bought and put to work.
A high amount can mean a capital-heavy shop or a large catch-up entry. A low or zero amount can mean the business rents what it uses, or that older items are already fully charged off.
The Balance Sheet does not list this expense as a line. The related account is accumulated depreciation, which holds the same dollars against the asset.
This charge is non-cash. Recording it does not lower the bank balance; cash already moved, or will move, when the asset is bought.
Some books post it only at month end as an adjusting entry. Others let a recurring entry hit the same accounts each period from a schedule.
How it works
A typical path starts after a capitalized purchase. The freezer is already on the books as a long-lived asset, not as this expense.
Each period you take a slice of that cost. You debit depreciation expense and credit accumulated depreciation.
That debit is what puts the cost in operating expenses. The credit does not take the asset off the books; it builds the contra-asset that reduces what the asset is worth on paper.
The amount comes from a depreciation schedule. The schedule holds cost, life, method, and what has been charged to date.
Stay with this expense line: it is the period's charge only. Accumulated depreciation is the running total; the asset account still holds original cost.
If you sell or retire the item, you stop recording this expense on it. Future periods do not keep charging an asset that is gone.
Keep the charge in the period that used the asset. A year-end dump of missed months makes that year's P&L hard to read.
Do not treat this line as the purchase. Buying the freezer is a Balance Sheet event; this account is only the later periodic charge.
Owners sometimes look at earnings before this non-cash charge. The P&L still includes the expense; that other view simply adds it back.
Example
An ice cream shop puts a walk-in freezer into service. This month's slice of that freezer's cost is $200.
The shop records:
Debit: Depreciation expense $200
Credit: Accumulated depreciation $200
Operating expenses on the P&L rise by $200, and accumulated depreciation on the Balance Sheet rises by $200. Cash has not moved.
The freezer is still an asset. This entry is the month's charge, not a removal of the freezer and not a check to a vendor.
Common mix-ups
Depreciation expense is not accumulated depreciation. The expense lives on the P&L for this period; accumulated depreciation is the contra-asset that holds every period's charge to date.
Depreciation expense is not the cash spent to buy the asset. Cash moves at purchase, or as a loan is paid; this line is the later, non-cash spread of cost.
Depreciation expense is not the asset itself. The freezer stays on the books at cost; this account only records the period's share.
Related terms
- Accumulated Depreciation: The contra-asset account holding all depreciation taken on assets to date.
- Depreciation Schedule: The supporting schedule listing each asset, its cost, life, and depreciation to date.
- Straight-Line Depreciation: Spreading an asset's cost evenly across each period of its useful life.
- Fixed Assets: Long-lived physical assets used to run the business rather than resold.
- Non-Cash Expenses: Charges that reduce profit without moving cash.
- Operating Expenses: The ongoing costs of running the business that are not direct costs of sale.
- EBITDA: Earnings before interest, taxes, depreciation, and amortization.
- Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.